Use Social Security Tax Break Wisely

The income tax package negotiated by President Obama and Congress resulted in an unexpected surprise for taxpayers.

For this year only, Americans will see bigger paychecks, thanks to a 2 percentage point cut in their portion of the payroll tax for Social Security.

That means individuals could end up with a payroll tax savings of up to $2,136 in 2011, according to CCH, a tax information provider. Households with two wage earners who both make more than $106,800 will get $4,272, double the amount for individuals.

This part of the tax deal was unexpected and is a pleasant surprise for taxpayers.

Use this extra money wisely and make it count big because it will be around only for 2011. Here are some ideas of what to do with the windfall:

"Keep the home fires burning," said Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling.

"If you struggle each month to make basic payments such as the rent or mortgage, utilities, insurance premiums, buy medicine, or even put food on the table, this is your opportunity to do something about it. Designate these payments as priorities, and use the extra money to get current and stay current on them."

"Debt is likely doing you the most harm financially, particularly if you're carrying debt over from month-to-month and paying double-digit interest on it," Cunningham said. "If you stop charging and put the extra money from your paycheck toward debt repayment, you'll see your debt decrease rapidly."

Whether you pay off one small bill, divide the money among all creditors, or put it all toward one large balance, you'll enjoy seeing your debt load go down each month, she said.

If you've fallen behind on your bills, put the extra money toward bringing them current.

"If you're behind on debt payments, putting this money toward catching up will stop the late penalties and negative notations on your credit report," Cunningham said. "Don't forget that late payment charges only add to your balance, so stopping these fees will be an extra bonus."

An estimated 30 percent of consumers have zero dollars in savings, according to Cunningham.

"These people are living on a very slippery slope, with the next unplanned expense often putting them over the edge," she said. "Put this extra money into a savings account, and commit to not pulling it out except for true emergencies."

One way to make sure the money goes to savings is to put it on automatic pilot. Have your bank automatically pull a fixed amount each month from your paycheck and put that amount in a savings account.

Certified financial planner Eleanor Blayney recommends that consumers think of this as an opportunity to set aside savings for their retirement.

After all, the money was destined for Social Security anyway.

"People may well need to save for what they may lose in Social Security benefits, or for the delay in those benefits," Blayney said. "The payroll tax cut will not come free. It is highly likely that while it confers a short-term benefit today, in the interest of stimulating the economy, it will have to be paid for in lower and later Social Security benefits."

That means the retirement plans of some may be blown out of the water.

"We have to get used to the idea that in our 60s, a time when many people expect to retire and draw Social Security, we are going to have to find other ways to support ourselves through continued work, through our own savings," Blayney said. "We cannot rely on Social Security for these years, and if possible, we should delay these benefits until our 70s.

"So my argument is to set aside some funds now that can be used during that decade to cover our needs."

Drugs are one of the main drivers of rising health care costs, so it would be wise to use the extra money from the payroll tax cut to save for the extra costs.

That's because under a provision of the new health care law that took effect this year, the cost of an over-the-counter drug can't be reimbursed from a flexible spending account for health care unless a prescription is obtained.

The change doesn't affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eyeglasses, contact lenses, co-pays and deductibles.

Since the provision took effect Jan. 1, claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer's plan.

A similar rule went into effect for Health Savings Accounts and Archer Medical Savings Accounts.

"With the job market still unstable, it is a good time to retrain or update your professional skills," Cunningham said. "Adding a certification or degree to your resume could result in you moving up at your existing job, or landing a new one."

While the government would love to have you spend the money to stimulate the economy, think more wisely.

"The smart consumer will realize that this money is a temporary windfall, providing the opportunity to stabilize his or her financial position," Cunningham said. "The specific use may depend on the individual's situation, but making a wise choice now regarding what to do with this extra money can mean the difference between being in financial quicksand and putting yourself on financial solid ground."